IBM Feels The Effects of Cloud

On June 12th, 2013, IBM announced that they had begun layoffs as a cost cutting measure. That’s unfortunate for the many good people at IBM that will lose their jobs. Is this a harbinger of layoffs at other information technology companies? I think it might be.

Ostensibly, the layoffs are designed to help cut costs. Speculation has it that this cost cutting is driven by wall street demands to improve operating performance and hence provide a higher stock price. The market has reacted positively to this announcement, at least in the short term.

But what’s the underlying cause of the problems at IBM? One clue lies in the performance of the server division. IBM tried to sell it off to Lenovo earlier this year. On top of that MSN reported that the hardware sales had dropped by 17% in it’s most recent earnings report. Software sales were also flat.

I believe this is part of the overall impact of cloud computing, especially cloud software, on the information technology market. It is causing a shift in who buys and who sells software. As more software becomes available as a subscription accessed through a browser, there is a greater shift to line of business buying. The big on-premises IT software buy through the IT department is diminishing in favor of managers buying software from a cloud vendor directly.

The shift in how software is bought and sold is causing a change in who buys hardware. Since the software vendor is now responsible for delivering the software in it’s entirety, they are the ones who run the data centers. Or, more likely, their cloud infrastructure partners. In reality, data centers are consolidating into the hands of a small number of cloud infrastructure vendors. The big shift for hardware is from millions of small and relatively inefficient corporate data centers to maybe a few hundred enormous and highly efficient cloud data centers.

The gain in efficiency comes at a cost. Each cloud provider needs hardware that is highly tuned to web-based applications. Some of this hardware they build themselves or are whitebox servers. That leaves general purpose hardware from a in a less desirable position. Cloud infrastructure vendors have virtualized environments which drive higher capacity utilization than many businesses can achieve. All of this means they need less hardware per deployed application than a typical corporate environment. The same is true for software. Cloud vendors can leverage infrastructure software such as databases better than a corporate IT department can by using them across more applications.

So it is no surprise that IBM is struggling to rebalance their work force. They are trying to move to a cloud-centric posture. It will be some time before that can happen for them but the acquisition late last year of Kenexa shows that they understand that the cloud shift is underway.

The bigger question is “Is this a trend or just an IBM problem?” My answer: It’s not an IBM-only problem. The shift to cloud applications and infrastructure is broad and will effect all hardware and on-premises software vendors. It’s hard to say whether they too will need to readjust the skill sets in their companies but my guess is that they will. The old ways of designing, selling, and marketing IT systems are changing and so must the vendors.

It’s unfortunate that IBM has to go through the pain of layoffs. It is especially painful for those who have spent the bulk of their careers with the company. Those good people have been caught up in the latest seismic activity of the computer industry. It is for IBM, however, a necessary move to adapt to change sin the industry.